East Asian Financial Crisis..

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East Asian Financial Crisis..

• -Lhamu Tsering

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Agenda..

• East Asia pre crisis
• Thailand
• Crisis timeline
• The dilemma
• Asian Weaknesses
• After the shock

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Countries involved..

• Thailand
• Philippines
• Hong Kong
• Taiwan
• Singapore
• South Korea
• Malaysia
• Indonesia
• China

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Thailand..

• May 1997 Thailand spends billions of its
  foreign reserves to defend the Thai baht against
  speculative attacks
• In case of Thailand
• Allowing too many short-term capital flows to
  accumulate with a high degree of currency
  speculation,
• Sustaining a fixed exchange rate when it was no
  longer suitable,
• Lack of sufficient risk management system at the
  national level as well as regional level.
• concerns of large current account deficits
• weakness in the Thai financial system
• culminating with the failure of a major finance
  company, Finance One
• Speculative attacks brings down investor
  confidence causing- capital flight
• Crisis in Thailand turned out to be a contagion

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Crisis Timeline..

• July 1997
• Thailand is forced to devalue the baht, which
  drops the value of the baht by as much as 20-- a
  record (had actually attempted a 15 controlled
  devaluation)
• Malaysias central bank intervenes to defend the
  ringgit.
• The Philippine peso is devalued. Indonesia widens
  its trading band for the rupiah in a move to
  discourage speculators
• The Singapore dollar starts a gradual decline.

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Crisis timeline..Contd/.

• August1997
• Thailand agrees to adopt tough economic measures
  proposed by the IMF in return for a 17 billion
  loan from the international lender and Asian
  nations. The Thai government closes 42 ailing
  finance companies and imposes tax hikes as part
  of the IMF's insistence on austerity
• Indonesia abandons the rupiah's trading band and
  allows the currency to float freely, triggering a
  plunge in the currency

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Crisis timeline..Contd/.

• October1997
• Indonesia asks the IMF and World Bank for help
  after the rupiah falls more than 30 in two
  months, despite interventions by the country's
  central bank to prop up the currency
• Hong Kong's stock index falls 10.4 after it
  raises bank lending rates to 300 to fend off
  speculative attacks on the Hong Kong dollar. The
  plunge on the Hong Kong Stock Exchange wipes
  29.3 billion off the value of stock shares.
• The South Korean won begins to weaken
• The IMF agrees to a loan package for Indonesia
  that eventually swells to 40 billion. In return,
  the government closes 16 financially insolvent
  banks and promises other wide-ranging reforms

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Crisis timeline..Contd/.

• November1997
• Bank of Korea allows the won to fall below 1000
  against the dollar (record low)
• December 1997
• IMF approves a 57 billion bailout package to the
  South Korea
• As part of IMF economic restructuring plan, the
  Thai government closes 56 insolvent finance
  companies (30,000 white collar jobs lost)
• South Koreas first president elected from
  countrys opposition party. In days the won hits
  new low.
• 3 billion emergency loan released by the world
  bank , part of a 10 billion support package.

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Crisis timeline..Contd/.

• January 1998
• Release of Indonesia budget plan pulls the rupiah
  to an all-time low
• Inflation rises. Prices for basic food staples
  in Indonesia increase by as much as 80
• The rupiah plunges to 12,000 rupiah against the
  dollar
• June 1998
• Japan announces that its economy is in a
  recession
• Yen falls to levels near 144 to the dollar. US
  treaury and Federal reserve intervenes to prop up
  the yen
• August 1998
• Wall Street reacts the Dow plunges 300 points in
  its third biggest loss

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Dilemma..

• Drop in currencies
• Raise import prices leading to inflation threat
• Threat that potentially viable banks and
  companies may become bankrupt
• Defend the currency
• would mean to raise interest rates
• Threat of economic slump resulting in the failure
  of banks

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Asian Weaknesses..

• Weaknesses that became apparent after the crisis
• Productivity economic expansion before crisis
  later explained by the rapid growth of production
  inputs (capital and labor) but relatively
  little increase in productivity
• Banking Regulation Ineffective government
  supervision
• Exchange rate regimes- Mostly pegged exchange
  rate system
• Legal Framework lack of structured legal
  framework to deal with bankruptcy

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After the Shock..

• Ties of some currencies to the dollar had to be
  abandoned resolving floating rate systems
• Supervisory process reforms
• Need for accumulation of high levels of
  international reserves
• Evidence that excessive capital inflows to a
  country to take advantage of high rates can cause
  unwise investment decisions

East Asian CA/GDP annual averages, percent of GDP) East Asian CA/GDP annual averages, percent of GDP) East Asian CA/GDP annual averages, percent of GDP) East Asian CA/GDP annual averages, percent of GDP)
Country 1990-1997 1998-2000 2001-2004
China 1.5 2.4 2.5
Hong Kong 0.6 4.1 8.7
Indonesia -2.5 4.6 3.9
Malaysia -5.6 12.8 10.3
South Korea -1.6 6.5 1.9
Taiwan 4 2.3 8.1
Thailand -6.3 10.2 5.1
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• Questions?????...